Facts of the case

The Federal Power Act (FPA) grants the Federal Energy Regulatory Commission (FERC) the authority to regulate the wholesale interstate transmission and sale of electric power. In 2011, FERC promulgated a rule that established uniform compensation levels for suppliers of demand-side resources that meet certain conditions, including cost-effectiveness as measured by a net benefits test. The rule’s stated purpose was to incentivize retail customers to reduce electricity consumption when it was economically efficient to do so. Various state regulatory agencies, trade associations, publicly owned utilities, transmission owners, and other industry groups requested a rehearing on the rule and argued that it conflicted with FERC’s efforts to promote a competitive market as well as FERC’s statutory mandate to avoid unjust and discriminatory rates. FERC confirmed the rule, and the industry groups petitioned for review in federal court. The U.S. Court of Appeals for the District of Columbia Circuit held that FERC did not have the statutory authority to directly regulate the retail market and that the rule was arbitrary and capricious because FERC did not adequately consider and respond to the arguments made in opposition to the rule.

Question

(1) Does the Federal Power Act grant the Federal Energy Regulatory Commission the authority to regulate the rules operators of wholesale energy markets use to pay for reduction in electricity consumption?

(2) Did the U.S. Court of Appeals for the District of Columbia Circuit err in holding that the rule was arbitrary and capricious?

John G. Roberts, Jr.:

Today's orders of the Court had been truly entered and certified and filed with the clerk.

Justice Kagan has the opinion of the Court this morning in case 14-840, the Federal Energy Regulatory Commission versus Electric Power Supply Association and the consolidated case.

Elena Kagan:

I can see we have a big audience for this FERC case.

The Federal Power Act divides regulatory authority over electricity between a Federal agency, usually called FERC and the States.

FERC has authority to regulate wholesale sales of electricity as well as any rules or practices that affect wholesale rates.

But the act leaves to the states the power to regulate any other sales of electricity namely retail sales.

The nation's wholesale electricity sales mostly take place in auctions run by nonprofit market operators.

In those auctions utilities which are the wholesale purchasers tell the market operators how much energy they want to buy and generators submit bids saying how much energy they can produce and at what price.

The operators then order as much electricity as is needed and give all the generators the price of the highest accepted bid.

That price can go up very high at times of peak electricity use.

Let's imagine and I guess we will have to imagine today, a hot August day when everyone wants to use air-conditioning.

That's because operators at those times have to accept bids from highly inefficient generators to meet demand, and in those peak periods the high volume of electricity flowing through the grid threatens to cause system interruptions like blackouts and brownouts.

To deal with those price and service issues market operators devised a new wholesale market practice called Demand Response.

That practice enables market operators at peak periods to pay consumers for not using electricity rather than to pay generators or producing more of it.

Often the result of Demand Response is both to bring down wholesale electricity prices and to improve the reliability of service.

Seeking to promote the use of Demand Response, FERC issued the rule at issue in this case.

The rule generally requires market operators to pay the same price to Demand Response providers for conserving electricity as to generators for producing it.

Various industry groups challenged the rule.

They primarily argued that FERC lacked authority to regulate Demand Response at all, because in doing so, or so they said, FERC was regulating retail electricity sales and that power belongs to the states.

They also argued, more narrowly, that FERC's decision here to require that Demand Response providers and generators be paid the same amount was arbitrary and capricious, essentially inadequately reasoned.

The DC Circuit agreed on both scores and vacated the rule.

We now reverse.

First, FERC has authority to regulate Demand Response in the wholesale market.

The Federal Power Act, as I said when I began, gives FERC the power to regulate rules and practices affecting wholesale rates so long as in doing so it doesn't intrude on state power over retail sales.

Demand Response clearly affects wholesale rates, that is its entire point and the rule doesn't regulate retail electricity sales.

It's true that the rule will affect the quantity in terms of retail sales but that is not the test for determining whether FERC is trespassing on the state's authority.

What matters here is that the rule regulates transactions that take place entirely on the wholesale market as part of carrying out FERC's duty to ensure that the wholesale market runs cost-effectively and reliably, because that so rule complies with the Federal Power Act's plain terms as well as with its underlying purposes.